KordaMentha looks to turn businesses around

Somewhere in Australia lurks a business with 3500 employees that recently had insolvency guru Mark Korda going through it with a fine-tooth comb.

Had it actually gone under it would have been front page news, but instead the business is back on track, its problems never making it into the press.

And they never will, says Korda.

He cites the company without any clues as to its identity to press a point that often gets lost; KordaMentha might be associated with administrations and receiverships of failed companies but a large part of what it does is fix up companies rather than cut them up.

There are now as many partners and directors working in KordaMentha’s turnaround division as there are in the traditional insolvency business.

“There’s always been in this industry a lot of workouts. The change that we’ve done is bring in different skills and get that part of the business branded differently," Korda tells Financial Review Sunday of KordaMentha’s turnaround business 333 Management.

“It’s a different way of thinking, so we’ve brought in different people with different mindsets. We’d rather turnaround a business than sell. It’s always good if you can do an operation and save the patient rather than have to bury them."

One of those people brought in with a different mindset is Simon Thornton, the chief of 333 Management who parachutes into businesses that are underperforming.

Company Profile

Thornton has never worked at an insolvency firm, having started his career in mining services with Caterpiller Inc before moving to Switzerland, initially with Caterpillar, and then taking a senior role at Pizza Hut’s Swiss operations. Thornton says being a CEO-for-hire is much like being the CEO of any other company, except when you first walk through the front doors the situation can be hairy.

“Usually when you go in there you have a lot of very unhappy people around, people who feel like the dream they’ve been sold hasn’t come through," he says. “They are faced with losing a lot of money, they face losing their jobs [and] you often find the management team have lost the will to live. They’re playing a losing hand of cards and they’re tired of being at the table."

Changing management is not always necessary but in most cases over half of the managers end up leaving, some due to the desire to get out, others because they’ve done something that means there’s no other choice. Fraud and accounting irregularities are common problems in businesses that have lost their way.

An example is the trucking business that Thornton became chief of in 2009. McColl’s Transport had once been a family business but was but up by private equity and bolted together with other logistics firms that were all carrying too much debt.

It was a garden that had become overgrown, says Thornton, with employees on the books who didn’t exist driving trucks that also didn’t exist. Internal controls were lax and one of its four division was losing so much money it was tipping all the profits from the rest of the business down the drain.

With the kind of clarity that comes from being an outsider, Thornton shut that business down and retrenched 130 staff. Extensive work on the rest of the rest of the company saw earnings rebound – a focus on workplace safety saw WorkCover claims fall from $1.6 million to $100,000 in two years. Last month BRW magazine named it “Best Mid-Market Business."

Thornton says the increased focus on turnarounds in Australia reflects trends overseas that are themselves the product of changes in banking regulations that occurred about 10 years ago.

Those changes meant banks started deciding how much money to lend to a business according to its capacity to repay the loan, rather than linking the loan to actual collateral such as machinery or premises.

“In the old days when a company was going broke the banks would call in the receivers and recover whatever assets they had security over and turn that into cash to pay themselves back," he says. “These days when banks find clients can’t pay it back there isn’t enough collateral to sell, and therefore they need to look at a different approach."

Having started the crisis in 2007 with massive listed companies like Centro, insolvency practitioners have moved through the overleveraged finance sector companies like Babcock & Brown, property developers, operators of tax-driven managed investment schemes and are now firmly ensconced in the more medium to small sized end of the spectrum.

The companies in trouble now are more likely to have problems with mismanagement or fraud as well as overgearing, he says.

“Broadly, things are not that busy. We’re probably one or two o’clock on the insolvency cycle," he says, adding the three or four o’clock is time to go home.

Among bankers there are warning signs that companies are spending too much cash, such as an aquarium in the reception. Korda says he has heard the aquarium rule one but his home-spun wisdom is more generic.

“We’ve always found there are no new ways of going broke. We understand most of the problems. Many of them are fixable if you’ve got time and some money."